Fitch Ratings: Prospects for leveraged loan issuance in Europe improving, ‘but defaults expected to rise’
(Boursier.com) — European leveraged loan issuance looks set to rise in 2023 as issuers adjust to new primary market conditions, though defaults are likely to rise, according to the latest European Leveraged report. Loan Insight from Fitch Ratings.
European leveraged loan issuance fell by 43.9% to €77.07 billion at the end of December 2022, a significant drop from the record high of €137.46 billion reached in 2021.
The 12-month default rate (TTM) fell to 1.2% at the end of December 2022, from 1.4% in September. The default rate for TTM loans remains below the rate of 2% recorded in December 2021, and the rate of 3.7% at the end of 2020… “However, we expect the default rate European leverage in TTM-2023, under the baseline scenario, will increase to 4.5% for 2023. Many loan market issuers that did not refinance under stronger market conditions in 2021 face maturities 2023 and 2024. Rising interest charges due to higher benchmark interest rates and widening spreads in primary markets complicate attempts by issuers to reduce leverage and refinance in markets tighter capital, especially when growth prospects deteriorate”.
Loans of concern
Loans of concern to the market, which reflect the composite rating profile, secondary market price discounts and maturity risk, remained high at 7.1% at the end of December 2022, in strong increase from 0.7% in December 2021, but down from the 7.9% peak reached at the end of 3Q22.
The weighted average yields of the ‘BB’ category in the secondary market fell in 4Q22, from 3.81% at the end of 3Q22 to 3.66%. Class ‘B’ spreads fell from 5.88% to 6.11% and class ‘CCC’ spreads reached an all-time high of 15.74% in the quarter ended December, an increase by 935 basis points compared to the record level of 6.39% reached in November 2021.